SOL-169-17-000002_-_Attachment_1_and_2.docx

USAID/Serbia: Competitiveness Systems Strengthening Activity

ATTACHMENT 1: DEVELOPMENT CHALLENGES

USAID’s understanding of the following development challenges underlies the selection of objectives and results under this contract.

Competitiveness is a vital issue Serbia needs to address in order to strengthen its economy, create jobs and be able to compete in both regional and international markets. In small economies with a limited domestic market, exports play a crucial role in stimulating economic growth. This is especially the case in Serbia, where low levels of per capita gross domestic product (GDP) create additional incentives for firms to seek profits in wealthier and more advanced European markets to be able to grow. The competitiveness of Serbian firms is all the more urgent as the country quickly moves toward the completion of the restructuring and privatization of the remaining state owned enterprises (SOEs). While unemployment rates are slowly rebounding, current rate hover at around 17%, and unemployment rates among women and youth are much higher. Thus Serbia needs to grow its competitive advantage as an essential prerequisite for long-term economic development and stability.

The Government of Serbia (GoS) has recognized the importance of support to small and medium-sized enterprises (SMEs) and their integration into local and regional economies as critical to Serbia’s socioeconomic development as well as its integration into the European Union (EU).[footnoteRef:1] To drive these efforts, the Serbian Ministry of Economy has developed a strategy for support to the development of SMEs, entrepreneurship and competitiveness from 2015 to 2020 (the “Strategy”). In it, the GoS recognizes that the engine of Serbia’s economic growth will be SMEs. The Strategy identifies six key issues/obstacles that need to be addressed and improved to support the development of SMEs and entrepreneurship. These include: [1: Program of the Government of Serbia, as presented by Prime Minister Aleksandar Vucic to the National Assembly of Serbia, August 9, 2016, available at http://www.srbija.gov.rs/.]

1) improving the business environment;

2) providing better access to sources of financing;

3) continued development of human resources/workforce development;

4) strengthening the sustainability and competitiveness of SMEs;

5) better access to new markets; and

6) enhancing entrepreneurship and encouraging women and youth entrepreneurs and social entrepreneurship.

The CSS activity has been designed to respond to several of these obstacles, and support Serbian efforts to improve SME competitiveness.

CSS’ approach was developed in response to findings from a Competitiveness Assessment and Political Economy Analysis conducted by USAID/Serbia between April and May of 2016. The assessment utilized USAID’s Applied Political Economy Analysis (PEA) methodology to identify key factors constraining Serbian SMEs’ growth and ability to compete, particularly in EU markets and against the companies and products of EU member states. One major finding of the Competitiveness Assessment was that many constraints related to SME development were related to low levels of communication and collaboration, a lack of institutional coordination and ineffective relationships between SMEs, institutions and virtually all other support actors.[footnoteRef:2] At the same time, USAID’s experience implementing economic growth programming in Serbia has proven that sectors of the Serbian economy do possess the potential to drive economic growth through enhanced productivity and competitiveness. If this potential is to be realized, a more concerted and coordinated effort will be required. [2: The full Competitiveness Assessment and Political Economy Analysis (Report #29), as well as an Organizational Network Analysis conducted to map relationships between key actors that provide support to SMEs in Serbia (Report #34) can be downloaded at the following links: https://www.microlinks.org/library/serbia-competitiveness-assessment-political-economy-analysis and https://www.microlinks.org/library/serbia-competitiveness-assessment-political-economy-analysis-organizational-network-analysis.]

In Serbia, the private sector is dominated by SMEs – SMEs account for 99.8% of all enterprises – yet the productivity of these firms is considerably lower than elsewhere in Europe. Average Gross Value Added (GVA) per employee in the average European SME is 41.3, while it is 10.9 in Serbia. Despite the overwhelming presence of SMEs in the Serbian economy, the SME sector generates only 55.2% of gross value added; 34% of the country’s GDP; and 9% of exports. Turnover and profit per employee is equally low compared to the EU average, making the Serbian SME sector uncompetitive and diminishing its contribution to the economy. In order to improve these figures, SMEs must invest in modernizing existing equipment, production methods and processes. In this respect the Serbian economy is almost 30 years behind the EU, a result confirmed by a representative survey of companies in textile, food processing, pharmaceutical, machinery, chemical and building material industries.[footnoteRef:3] Enhancing the productivity and competitiveness of SMEs will be crucial to improving Serbia’s prospects for economic growth, since the SME sector highly influences the performance of the Serbian economy and its ability to export, which is far below its potential and mostly dominated by raw and semi-finished products that have relatively low market value. SMEs face a number of constraints, including lack of market intelligence and access to information; lack of production quality, quantity and continuity; inadequate support from business service organizations (BSOs) and lack of adequate technical expertise. The majority of SMEs also have inadequate technology and limited opportunities for innovation. [3: Serbian Enterprises and Global Competition Challenges (Dejan Djordjevic, Dragan Cockalo, Savina Djurin) October, 2011.]

There are also significant labor market coordination issues. On the one hand, during the first quarter of 2016 the overall unemployment rate in Serbia was 17% and higher among women and youth, while in some regions it approached 50%. At the same time, Serbia’s workforce currently does not fully meet the needs of the private sector; there remains a preference for public-sector over private-sector employment and self-employment; there are few or inadequate vocational schools or curriculum; inadequate training programs or technical expertise are offered by business support organizations; and firms fail to invest in their own human capacity.

The majority of SMEs also have inadequate technology and limited opportunities for innovation.[footnoteRef:4] According to the 2015-2016 World Competitiveness Report, Serbia has very limited capacity in almost all aspects of innovation and technology transfer, and overall is ranked 132 out of 140 with respect to capacity for innovation. Serbian SMEs have an insufficient ability to adjust to market changes and have a low share of high value added products. Approximately only one in five companies introduces a new product/service or a new production process; and only one in seven companies cooperates with other business entities or institutions in the field of innovation. The commercialization of domestic research, through increased technology transfer and innovation is very low. Companies pay very little attention to innovation, developing unique or higher quality products, modernizing their production facilities, or introducing modern management practices. Moreover, SMEs face a number of constraints to export, including lack of capacity to research and analyze markets systematically; lack of production quality, quantity and continuity; inadequate support from BSOs and a lack of adequate technical expertise. [4: For the purpose of this RFP, innovation is defined in its broadest sense, i.e. as developing a new or significantly improved product, applying new or improved processes or services, or marketing methods, or a new organizational or operational model, workforce improvements, as well as new processes or products to respond to environmental challenges or climate change. In this sense, innovation could also be defined as any technological or non-technological improvement that creates added value.]

The institutional infrastructure for SME development consists of a network of public institutions and agencies – the National Agency for Regional Development (NARD) and the Serbian Import Export Promotion Agency (SIEPA), which have been merged into a Serbian Development Agency (RAS), Fund for Development, the Export Credit and Insurance Agency (ECIA), and the National Employment Service – but the activities and services offered by these institutions do not appear to be coordinated and are not seen as providing adequate support to address the needs of SMEs. Similarly, there is currently no strategic or legal framework that supports the development of an ecosystem for SME development, including business incubators and accelerators, industrial zones, technology and innovation parks/centers.

Access to affordable finance is also an issue; only around 26% of SMEs use external sources of funding. With respect to access to finance, challenges exist both with supply and demand. From the supply side the most significant obstacles are very unfavorable banking terms and conditions, including high interest rates, weak incentives to lend to SMEs, poor banking and service suitability, as well as persistent weaknesses in credit enforcement. Also, in spite of the limited supply of finance from banks, no alternative channels for financing have emerged, including capital market products, and non-banking financial institutions. At the same time, there are obvious demand/SME side constraints that contribute to this problem: the weak financial capacity of SMEs, SMEs’ lack of capacity to adequately present their businesses to lenders, and weak SME market leverage.

While Serbia has seen overall improvement in its business enabling environment over the past few years, due at least in part to USAID’s support for key reforms such as the labor law, construction permitting and reform of Serbia’s inspections regime, much work remains to be done if the objective of the reforms are to be fully realized in terms of improving the predictability and transparency of government interactions with the private sector. It is also the case that a number of areas have not seen significant improvement over the past few years, including tax administration and access to finance. The overall state of the business enabling environment continues to provide a powerful incentive to SMEs to remain within the gray economy. By some estimates unregistered businesses represent 28% of all business entities in the country.

ATTACHMENT 2: USAID/SERBIA CDCS RESULTS FRAMEWORK

Result

Indicator

IR 2.2: Private Sector Networks Strengthened to Enhance Competitiveness

2.2.1: Increase in exports of selected value chains

Sub IR 2.2.1: Selected Value Chains Developed

2.2.1.1: USD sales of firms receiving USG-funded assistance.

2.2.1.2: Increase in number of firms feeding into the anchor firm’s value chain.

2.2.1.3: Increase in the frequency of transactions (orders, deliveries, etc.) between firms within the value chain.

2.2.1.4: Increased cooperation among value chain participants.

Sub IR 2.2.2: Economic and Business Development Services Enhanced

2.2.2.1: Increased information sharing among sector participants.

2.2.2.2: Number of joint advocacy initiatives developed.

2.2.2.3: # of private sector firms that have improved management practices or technology as a result of USG assistance 2.2.2.4: Number of relationships with R & D institutions created/increased.

2.2.3.2: # of types of financial products used by SMEs (as reported in annual business survey).